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Health Care Is a Market Failure

This week, the U.S. Senate rolled out its version of Obamacare repeal, called the "Better Care Reconciliation Act." The bill would brutally strip coverage from many millions of Americans, while raising costs and reducing coverage for tens of millions more. And it redistributes the money gained by stripping coverage mostly to people who already have a lot of money, and already have access to great care.

But even if you think taxes need to be cut and it's OK to strip coverage from people, there's a lot to dislike about the bill. It does nothing to solve the most important problem with U.S. health care, which is its grotesquely high cost structure. And as a result, the Senate bill fails to relieve the burden that our health care system places on national competitiveness and profits for nearly every major U.S. businesses (except the few that feed at the trough of this broken market).

The fundamental problem with our health care is straightforward: It costs way more than it should relative to what it delivers. We can say this with confidence because we know what each developed country pays for health care. And we know what each country experiences in terms of average life spans, infant mortality, disability and so on. Let's act like smart shoppers and compare what health care costs versus the outcomes that it delivers, country by country.

When we shop around, we learn that the U.S. spends about 17 percent of GDP on health care, while getting outcomes that are no better and in many cases significantly worse than in other advanced nations. Our infant mortality rates, for example, are near the bottom of the pack. Meanwhile, other developed countries spend 8–12 percent of GDP on health care. We're spending roughly twice as much money and getting nothing for this extra cost.

Whatever you may think about this from humanitarian grounds, you should be concerned about the broader effects of this on the economy, on businesses and on the U.S. competitive position. Warren Buffet called medical costs "the tapeworm of American economic competitiveness" and he's right. After Obamacare is repealed, sick people will still go to the hospital, and the hospital (constrained by both law and decency) will not turn them away. But who will pay the hospital for treating these uninsured patients?

The cost will fall mainly on American corporations: The hospital will mark up its rate structures to cover treating the uninsured; they'll get away with it because they face little competition. The health insurance company will raise their rates to cover the higher hospital costs, and America's businesses get the bill. But consider that most U.S. businesses compete on a global market (though not the proverbial ice cream parlor on Main Street). In the world of international competition, if the U.S. medical system costs 17 percent and the rest of the world's costs about half that, then U.S. corporations need tack on an extra 8 percent or so on to the price of everything. That translates directly to lost market share, lost jobs, lost profits.

These losses reverberate through the economy and end up cutting into tax revenues that the government needs to operate, even in the most lean, libertarian version of government. When companies lose share and profit, they pay less corporate tax and their CEO's and investors make less money. As a result, the government collects less tax at any given tax rate. And so, even as Congress touts tax savings from slashing Medicaid, much of that tax savings will soon evaporate due to erosion of the U.S. competitive advantage.

None of this is to say that Obamacare got it right. Ironically called the "Affordable Care Act," Obamacare made health care more available but did nothing to make the overall system more affordable. It too shied away from taking on the fundamental restructuring that our health care system needs. But the Senate's proposal shreds the "available" part while doing nothing to create a system we can all afford. That's a cop-out that both conservatives and liberals should refuse to accept.

David Brodwin is a co-founder and board member of American Sustainable Business Council. This blog is adapted from a column recently published in U.S. News & World Report June 23, 2017.